Hopes Run High
For FTSE in 2013

The FTSE 100 kicked off the New Year in style, breaking through 6000 points on the first trading day of 2013 and finishing the week at its highest level since Feb. 8, 2011.

And analysts expect the index's early year gains to continue.

The analysts cite actions by central banks, improving economic conditions in the U.S. and China, and rising company profits for their bullish forecasts for the year.

"In our view we need to get used to a FTSE above 6000 again and target 6575 for the end of 2013," analysts at Deutsche BankDB0.78% wrote in a note to clients last week, saying that the index's 6.3% gain in 2012 wasn't as strong as other European and global stock markets last year.

The index finished last week at 6089.84, a 3.3% gain over the first three trading days of 2013. It is still down 12% from its record closing high of 6930.20, set on Dec. 30, 1999.

"While the acceleration of growth will be modest," the expansion of central-bank balance sheets in developed markets "is likely to accelerate, especially in Japan and the euro area," Credit Suisse analyst Richard Kersley said.

"As a consequence, we believe that while headline inflation will be muted, inflation expectations will rise, which should benefit equities relative to bonds."

However, while on the whole analysts expect the FTSE to rise in 2013, they also expect another volatile year.

Gains in the first week of 2013 came after U.S. lawmakers struck a last-minute deal to prevent the implementation of spending cuts and tax increases that posed a threat to the U.S. economy.

But the issue, which had weighed on the FTSE and other markets toward the end of 2012, isn't entirely resolved.

The U.S. government still has to wrestle with the country's deficit and its looming debt ceiling.

The health of the euro-zone economy could also still worry investors, although fears that Greece could leave the bloc have diminished over the past year.

The country was recently given its second tranche of its international aid following a successful debt buyback.

Against this backdrop, Charles Stanley technical analyst Bill McNamara expects the FTSE to end 2013 at around 6375.

He is less optimistic about the outlook for the first quarter, when he expects investors to react to overbought conditions by taking some profits.

Mr. McNamara also believes a deal on the U.S. debt ceiling is unlikely to materialize quickly, resulting in more uncertainty and little prospect for a market rally in the near term.

"Nevertheless, the outlook for the year as a whole is positive and it is our expectation that improving conditions in the U.S. and China will ensure the FTSE makes decent headway," he said.

Guy Foster, a strategist at Brewin Dolphin, is a bit more modest in his outlook, given the uncertainty over what might happen in Washington.

He cited a year-end forecast of 6350 for the FTSE.

"We still expect markets to reflect earnings growth of around 9% with no re-rating, while these political uncertainties weigh," he said.

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